updated 02:05 am EDT, Fri June 14, 2013

DOJ claims Cue, Jobs discussed deal with Amazon to stay out

In further testimony on the last day this week of the Department of Justice e-book price-fixing trial, Apple Senior Vice President of Internet Software and Services Eddy Cue told the judge that Steve Jobs had been initially opposed to the idea that became the iBookstore -- not believing that the tablet would be an ideal device for reading compared to dedicated e-readers such as the Kindle. Cue said he was responsible for persuading Jobs by telling him of the benefits of e-books on the iPad, which won Jobs over.

In earlier testimony under questioning by government attorneys, Cue admitted that Apple's use the "agency" model and its entry into the market caused e-book prices to rise initially -- but said this was because of publisher unhappiness over Amazon's undercutting of suggested prices, rather than on instructions from Apple. The agency model, where publishers set the prices and resellers get a predetermined percentage, was the only solution to give publishers the prices they wanted as well as ensure that resellers were profitable.

Thus far in the trial, representatives from the publishing companies have largely backed up Apple's contention that the goal was a "sustainable" model for e-book pricing rather than harming consumers -- the publishers feared that Amazon's continued loss-leader pricing would devalue e-books in the market, prohibit competitors from establishing alternative outlets, and would eventually result in Amazon using its monopoly position to demand cuts to wholesale e-book prices. Amazon at the time held 90 percent of the market, and was already known for bullying publishers who resisted its pricing.

Publishers had largely begun fighting the predatory pricing by raising wholesale prices -- but Amazon simply continued to undercut, taking an ever-larger loss. In an email later, Jobs warned reluctant publishers that Amazon's stockholders would not allow that situation to continue indefinitely. Another practice employed by the publishers was called "windowing," where an e-book version would not be available for a period of time (other testimony set the "window" at about seven months) to prevent the discounted e-books from cannibalizing print sales of new titles, then the publishers' main source of income. Amazon initally reacted to "windowing" but threatening and in some cases pulling all the e-books from the publisher from sale, knowing consumer sentiment would blame the publisher.

Cue told the court that he had nothing to do with any side discussions about what to about Amazon's predatory pricing practices. Jobs did not want to enter that market, and the two even had an alleged discussion with Cue that proposed Apple talk to Amazon and agreeing not to enter the e-book market if Amazon would stay out of the digital music market, reports CNet. The claim, presented by the government, was never acted on -- potentially another misfire in the DOJ's case, reflecting a habit of cherry-picking quotes out of context. The prosecution has tended to rely heavily on draft emails, secondhand conversations and other hearsay allegedly from Jobs -- who cannot defend or contextualize any of the remarks.

Cue said that Jobs gave him the job of securing deals with the publishers in November of 2009, leaving Cue only two months to conclude negotiations before the iPad was to debut in January, when Jobs wanted to include the introduction of the iBookstore. Cue described the weeks of negotiations and similar-but-separate agreements worked out with publishers, often after much persuasion and difficult obstacles from publishers.

Though the prices of bestsellers did go up after Apple opened its iBookstore in 2010, overall e-book prices have gone down since then. Cue said that he believed that while some e-book prices would stay higher than Amazon's loss-leader pricing, consumers would ultimately benefit both from a wider selection of offerings as well as more diversity of publishers and outlets to buy e-books.

Cue angrily denied a government charge that Apple "didn't care" if consumers had to pay higher prices, saying that "consumers were protected by my price points" -- meaning that the suggested retail of $13-15 for e-book bestsellers, while still dramatically lower than print versions that typically sold around $30, were sufficient to keep publisher profitable and that the agency model protected even iBookstore competitors by ensuring a level playing field for any new entrants. Amazon itself eventually signed "agency" model agreements.

A government witness testified on Thursday as well, noting that statistical evidence showed that some e-book prices did in fact go up, though the market overall was largely unaffected. However, he said that because bestsellers tended to increase in price, some consumers were harmed by Apple's entry into the marketplace the agency model it brought with it. He also admitted, however, that discounting and new publishers and authors entering the market had created an overall lowering of prices, with some e-books going for as little as $3.

The DOJ's argument appears to rest on the idea that a lower consumer price is always beneficial to the consumer, ignoring the detrimental effects that can result (such as fewer companies competing or fewer publishers able to profit at highly-discounted price points). It has called Cue the "chief ringleader of the conspiracy" to control e-book prices, though plenty of evidence has been presented by both sides that publishers were already unhappy with the wholesale model and wanted to find some alternative. The DOJ has insisted that Apple, and not the publishers themselves, forced the market (and eventually Amazon itself) to an agency model and away from the wholesale model.

In Thursday's hearing, the DOJ introduced the email (seen below) that it said showed Apple considering dividing up the media business with Amazon, but the actual email itself only proposes that each company become a reseller of the other's goods; that Apple become an Amazon reseller for e-books while Amazon become an iTunes Store outlet for music. In the email to Jobs in which he discusses the idea, Cue admits that he doesn't think Amazon would go for the proposal. The government did not offer any reply to the email from Jobs, suggesting some possible "cherry-picking" once again. Whether Jobs considered the idea valid or not, it was not what the company ultimately decided to do.

Cue mostly kept his composure under relentless questioning from government attorneys, but did get somewhat emotional when he described his efforts to secure the book deals with publishers before the debut of the iPad. Though Jobs would eventually live another 10 months, Cue said he felt "tremendous pressure" to get the deals done because Jobs was "near the end of his life" and that he wanted to get the agreements secured "for him."

Cue was a right-hand man for Jobs for over 10 years and has been with Apple for nearly a quarter-century overall. He will resume his testimony next week.